Best Practices for Lower Middle-Market Acquisitions 1

Best Practices for Lower Middle-Market Acquisitions

By Scott Whitaker, Partner US


The purpose of this article is to share best practices and lessons learned from our carve-out and integration work in the lower to mid market deal range.

The middle market is typically broken down into two tiers: Lower Middle Market: $5 – $50 million of revenue and Middle Market: $50 – $500 million of revenue.

The specific insights and recommendations in this article are gleaned from our work in supporting an average of 50 transactions a year in the lower middle (LMM) and mid-market (MM) segments, across a broad range of sectors, business models and transaction types.

 

Common Challenges and Situational Dynamics

For most companies, an M&A event is the one of the most intense and seemingly chaotic periods they will ever experience. Think of all the things that are “in play” during a typical integration:

  • The company’s strategic direction and business focus
  • Corporate leadership and governance structures
  • Individual roles and responsibilities
  • Policies, processes, and business practices
  • Corporate office and facility locations
  • Financial performance
  • Reprioritization of business investment and capital allocations
  • Product and service portfolios
  • IT and operating infrastructures
  • Suppliers and customer mix
  • Cultural changes
  • People’s feelings and aspirations are challenged
  • Scale and synergies challenges

These are just the most common examples, as virtually everything is in flux during a full integration.

However, integration activities also can offer a tremendous amount of opportunity for growth, market and geographic expansion, product and service expansion, personal growth, and a host of other levers to improve market value and company performance.

The key is to address the integration challenge, so it does not derail realization of the value drivers of the deal thesis, undermine morale and disrupt business continuity.

 

While every transaction has its own unique dynamics & challenges, the four areas below tend to feature in most LMM and MM transactions and can adversely affect results if not addressed properly:

  1. Underestimating integration requirements and level of effort
  2. Lack of understanding of culture & communication requirements
  3. Inability to identify & address scalability gaps
  4. Failure to prioritize strategic workstreams, value drivers and organization planning early

Let’s explore several dimensions of each issue, specifically:

  • Description & characteristics: What is the issue? How does it manifest in the integration setting?
  • Adverse side effects: What are the most common negative impacts of the issue?
  • Mitigation best practices: What are the most proven methods to avoid or mitigate the issue?

 

Underestimating integration requirements and level of effort

Description & characteristics:

  • Companies with this issue tend to treat integration as just another one-off exercise, like an internal project to be managed the same as any other.
  • They underestimate the level of effort for full people, process & technology integration, and often realize the problem too late. (Many of our clients are companies who tried to manage an integration this way and do not want to repeat the experience.)

Adverse side effects:

  • Failure to achieve integration objectives and realize deal thesis.
  • Delayed integration completion as the effort becomes bogged down and gets deprioritized.
  • Poor experience for acquired employees, which will drive voluntary turnover and result in the loss of key personnel.
  • Customers and suppliers are confused and frustrated by the poor execution.

Mitigation Best Practices:

  • Confirm integration scope as part of deal thesis (e.g., full, partial, none) and establish a timetable (e.g., integration complete target is 8 months)
  • Articulate and prioritize value drivers and program level integration objectives to flesh out what must get done and by which function
  • Review due diligence through the integration planning lens to identify potential integration challenges and expected level of effort
  • Gauge integration effort against current business priorities to confirm bandwidth challenges
  • Define a clear and universally agreed end date for the integration to be completed (and define what is meant by “completed”)

 

Lack of understanding of culture & communication requirements

Description & characteristics:

  • These companies tend to undervalue the importance of communication in the integration process. Often it is because they typically have poor communications practice or immature communication processes overall. Examples of “poor” communication practices include infrequent and sporadic (often reactive) communication efforts, underdeveloped or inadequate formal communication channels, no dedicated internal and/or external communication lead, and no champion to support better communication practices in the C-suite.
  • They also are somewhat blind as to the cultural integration challenges inherent in any M&A event, often because they have made little effort to understand their own culture, let alone assess the culture of an acquired company to understand it better.

Adverse side effects:

  • Lack of preparation for Day 1 communications, often preparing only the bare minimum and leaving many questions from employees, customers, and suppliers unanswered or vague.
  • Employee confusion and disengagement both for acquired employees and existing employees.
  • Customer defections.
  • Supplier confusion.
  • Ongoing “what about?” questions that should have been answered as part of Day 1 communications cause unnecessary distractions, as urgent open issues dominate the post close period and adversely impact integration momentum.

Mitigation Best Practices:

  • Complete the following communications material sand have ready to distribute on Day 1: Employee key messages & integration guide, employee FAQs, customer key messages and FAQs, Supplier key messages and FAQs, and other materials as needed.
  • Ensure a well-coordinated Day 1 by preparing a detailed “run sheet” with all meetings and logistics outlined and prepared and agreed upon in advance.
  • Complete a culture scan or assessment to better understand cultural integration challenges.
  • Update employees and other key stakeholders throughout the first 90-120 days post close with integration success stories, key news and events, and recognition for employees.

 

Inability to identify & address scalability gaps

Description & characteristics:

  • Management assumes the acquiring company’s people, process & technology backbone can absorb acquisition targets with minimal or no investment.
  • Management is not aware of where the scalability gaps are for their own company, or what the demand of the new acquired company may do to stress existing operation or processes.
  • Lack of understanding of human capital and whether existing and/or acquired employees have the skills and experience to handle the demands of the newly combined organization.

Adverse side effects:

  • Failure to achieve investment thesis.
  • Delayed integration timetable as scalability gaps are discovered during the integration process.
  • Employee fatigue and burn-out as folks are put into difficult positions they may not be prepared for.
  • Inability to handle additional and planned M&A due to business continuity disruptions and delayed integration.

Mitigation Best Practices:

  • Assess critical functional areas in the business through the lens of the investment thesis.
  • Test key transaction assumptions against platform and target capabilities.
  • Pinpoint areas of development required to support increased platform M&A activity. Examples of areas to explore: Product management, product development, go-to-market, order-to-cash, procure-to-pay, human capital hire-to-retire, professional/ancillary services delivery, customer support/service (final list customized by platform), Definition of current capacity. (How much business can the company handle given its current organization structure, staffing, processes, and systems?)
  • Prioritize and incorporate findings into current or planned integration efforts, or normal business infrastructure optimization efforts.

 

Failure to prioritize strategic workstreams, value drivers and organization planning early

Description & characteristics:

  • Pushing off or deprioritizing key strategic workstreams like product roadmaps, go-to-market strategy and branding until later in the integration process
  • Struggling to address difficult strategy and/or personnel decisions early on
  • Lack of proper due diligence to integration planning handoff

Adverse side effects:

  • Failure to codify integration value drivers and program level objectives obfuscates the ability to define target integration end state and key milestones required to get there.
  • Consequently, delayed organization alignment can frustrate employees, delay integration and result in loss of key employees.
  • Insufficient integration planning timeframe.

Mitigation Best Practices:

  • Address and solve strategic workstreams early in the integration planning process, so that output and decisions can cascade down and inform detailed workplan development.
  • Organizational planning decisions and a well-planned roll-out timeline with supporting communication should be a First 60- to 90-day deliverable (or the sooner the better).
  • Synthesis investment rationale and deal decks into specific integration planning objectives (i.e., separate deal rationale from integration objectives)
  • Start integration planning at least 30-45 days pre-close

 

Integration Planning & Execution Mandatories for LMM and MM acquisitions

Assuming you have addressed some of the common challenges outlined in this article, making sure you have the basics of integration planning & execution covered should be your next priority.

The following is a helpful summary of some of the more tactical basics to consider.

Planning Framework:

  • Establish a planning and execution regimen calibrated for the most typical M&A scenarios for your small- to mid-cap acquisitions.
  • The process should be designed to maximize internal resources and follow a logical flow that helps empower integration teams to plan and execute flawlessly.

Governance:

  • Design & deploy a simple but effective governance process that facilitates the creation of solid planning direction and ensures rapid risk and issue mitigation.

Synergy Program Management:

  • If required, be sure to establish a synergy program management approach for organizing and tracking all cost saving and revenue enhancement synergy initiatives.
  • Synergy initiatives should be embedded within the overall integration program so that dependencies and accountability are vigorously tracked and manage to ensure realization timeframes don’t slip.

Communications:

  • From signing to closing and for at least 120 days post-close, make sure your communication planning approach keeps employees, customers, suppliers and any other key stakeholder audiences engaged and informed during all critical apertures of an M&A event.

Tools, Templates & Technology Platform:

  • Even if M&A might be an infrequent event, establishing an arsenal of tools and templates will help speed through some of the more routine planning and execution challenges in M&A.

Program Management & Reporting:

  • Ensure weekly tracking and reporting package is designed to add value, inform rapid decision making, and accelerate execution.
  • Be ready to scale up issues as soon as they appear (or even before they appear).

 

 

Scott Whitaker
 
Partner US

 

 

 

About Global PMI Partners

When Global PMI Partners started in 2009, our mission was to help our clients simplify the complex task of M&A, specifically by improving their integration planning and execution.
Since then, we have helped hundreds of clients from nearly every sector plan and execute integrations, carve-outs, business transformations and create playbooks to support ongoing acquisition activity.

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